Bond ETF Investing Warrants Caution

By Lowell Herr: Bonds are normally part of a portfolio, particularly as one approaches retirement. The need for income and reduced portfolio uncertainty are more important for retirees than required for twenty- and thirty-year-olds. Given the importance to include bonds in a portfolio, what is the current outlook for bond and Treasury ETFs in this market?To answer the question I selected eleven bond or Treasury ETFs that span both the domestic and international markets. I inserted two REIT ETFs for reasons I'll explain later. Short-term and intermediate-term bonds are also included in this analysis I title, "Bond Delta Factor." What the following table does is examine the historical performance of each ETF as well as the projected future growth rate over the next six to twelve months. The difference between the future and historical percentages forms the values in the Delta column.The "Delta Factor" column uses information from the Historical, Future,Complete Story »

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By Lowell Herr: If one is launching a new portfolio or added an asset class to the portfolio, when does it make sense to purchase an ETF? While there is no perfect answer to this question, one can use the laws of probability through the projections of something I call the "Delta Factor." Before looking at an extensive list of ETFs under current market conditions, let's go back three years to April 13th of 2009. The broad market was just off the bear market lows.

Lowell Herr submits: Having mastered "The Golden Rule of Investing" (save as much as you can as early as you can), how does an investor go about constructing a beginning portfolio? This is a familiar question from young and not so young prospective investors. Below is a starter portfolio using ten ETFs that cover the domestic and international markets.The basic ETFs for this beginning portfolio are the following:

By Lowell Herr: Portfolio construction takes many forms and one of the most popular is to lay out a Strategic Asset Allocation (SAA) plan and then find the appropriate securities to fit those asset classes. A different approach is to take a group of dividend aristocrats, supplement them with dividend oriented Exchange Traded Funds (ETFs), and add a few additional ETFs that are known to have low correlations with equity securities.

By Lowell Herr: Basic financial principles require that long-term investment portfolios exhibit diversification, include potential inflation and deflationary holdings, but still have an equity orientation. The following 20-ETF portfolio meets these requirements although the portfolio is unlikely to hold inflation and deflation securities at the same time.

By Lowell Herr: This week a Seeking Alpha article posited that all asset classes world wide are currently overpriced. "Every Major Asset Class In The World Is Overpriced" is the Seeking Alpha article stating this condition and the Delta Factor data below supports or underscores this position. In addition, current Bullish Percent Indicators (BPI) data also comes to this same conclusion.

By Lowell Herr: Market volatility over the last several years is pushing me toward reconsidering a buy-and-hold strategy. In an effort to lower portfolio volatility, I am testing a "risk reduction" model and part of this experiment is to better understand when particular asset classes are fairly valued.

MyPlanIQ submits:As we pointed out in our previous article, one can vary along three dimensions in fixed income investing: Interest rates (long vs. short maturity), credit (high yield or junk vs. investment grade) and international (vs. domestic). The following table shows the trend scores across various bond ETFs.

By Lowell Herr: Gauss is the newest portfolio launched (12/27/2011) here. While the annualized performance is a respectable 25%, it still lags both the VTSMX and ITA Index benchmarks as it took time to populate all 15 equity and bond asset classes. The broad market was in a positive mood during the launch phase and as a result, the portfolio fell behind the benchmarks.

By Lowell Herr: Several days ago, I published "Delta Factor" projections for a number of bond ETFs common to investors who use bond ETFs in their portfolios. Before discussing similar projections for international ETFs, allow me to digress and explain the general ideas behind the "Delta Factor."